In California Cool is the Rule, but Sometimes, Bad is Bad

Californians value cool. I’m not sure how this came to be. It might be the weather. It might be the entertainment industry. Whatever the reason, Californians don’t get excited. Better to go with flow than to get excited. Things will be ok. Concerned about the economy? Stay cool Dude. It’ll come back. Always has. Always will. Relax.

It’s not cool to get excited, or heaven forbid, panic. Californians are not quick to react to problems, so confident that eventually the problem will just go away. This was forcefully brought home to me when a member of California’s legislature told me that “It doesn’t matter what we do in this building. California will always rebound.”

California’s governance is seemingly designed to enforce cool in the government. Term limits, two-thirds requirements, and bipartisan gerrymandering combine to insure that change is not legislated. So you see absurdities, such as the legislature’s worrying about the asbestos content of the State Rock while the budget-less State goes down the path of bankruptcy and economy collapse.

Veteran capital-watcher Dan Walters likes to say that when legislators do agree and actually do something important, it’s usually bad. He cites California’s failed “electricity deregulation” back in 2000 as a case in point. The state does have a release valve, the initiative, which is much hated by the political class. But it is their fault. Legislative inaction is probably one reason for the increase we’ve seen in ballot initiatives. Of course, initiatives are seldom the optimal way to create change.

Proposition 13 is an excellent example. Sacramento was aware of the property-tax problem, but was unable to deal with it. That created a vacuum, and the radical tax reformers stepped in. The result was a far more draconian and less flexible law than necessary or desirable. That’s the way initiatives work. The legislature fails to legislate. Inaction creates a vacuum. The vacuum is filled by more extreme interests. The resulting law is almost always flawed.

California cool may be legendary, but as the Huey Lewis song says, sometimes bad is bad, and California’s economy is bad, very bad, and it’s not going to get better soon without real change. Plenty of lawmakers, especially the governor, are counting on renewable energy and green industry to provide California with an economic rebirth. It won’t happen. Read why here and here.

I’m thinking that now would be a good time for Californians to lose their cool.

Recently, Boeing announced that it is moving two programs from Long Beach California to Oklahoma. The move will cost California about 800 mostly well-paid engineering jobs. This is a relatively small event in an economy the size of California’s, but it is part of a steady drumbeat of businesses leaving California. Northrop Grumman has already decamped. General Dynamics’ San Diego shipbuilding subsidiary, Nassco, is shrinking its workforce by 300 workers, most of them highly skilled. Even the entertainment industry is slowly reducing its footprint in California. The list goes on and on.

The main reason: California is an expensive place to do business, and the expense is made more onerous by uncertainty about future taxes and regulation. Consequently, those businesses that can increasingly are departing for more reliable, friendlier climes.

Policy makers may find excuses for each of these events, but the persistence and size of the differences between California’s economic performance and those of better-managed states indicate something few in Sacramento understand: many of California’s economic problems are self inflicted. How big is the difference between California’s economy and other states? The unemployment rate provides one answer: California’s unemployment rate is about 30 percent higher than that of the rest of the country. That’s big, far larger than can be explained by demographic factors.

High and persistent unemployment is not the only result of California’s job-killing environment. Income inequality is increasing, a legacy of declining opportunity for skilled blue collar workers and a failed educational system. Home prices and sales will not recover for years. Commercial real estate is in freefall, and we may not see anything approaching full occupancy for a decade. Real-per-capita retail sales may never recover, a result of joblessness, high taxes, and increased internet competition. Perhaps the most telling trend is that domestic migration has been negative for most of the past 15 years, as people vote with their feet and seek opportunity in other states.

About the only source of hope, in a perverse way, is that government revenues are down. By now, it should be clear, even to those who thought their income was independent of economic activity, that a prosperous private sector is a necessary precondition for general prosperity. Professors, non-profit-sector workers, and government employees are learning the hard way their dependence on the private sector. We can hope that personal interest will drive them to more enlightened policy.

That hope is tempered, though, by the political class’s willingness to embrace the mirage of a free lunch. The AB 32 climate change and SB 375 anti-sprawl bills were the result of a well-meaning search for the Holy Grail of costless environmental and economic virtue.

Environmental and economic interests are not inherently incompatible, but environmental quality is not costless. In fact, it is a luxury good. Wealthier societies invest far more in environmental protection and rehabilitation than do subsistence societies whose primary concern is finding the next meal. In short, environmental protection requires investment, and wealthier societies are better able to pay the price.

California’s leadership’s embrace of AB32/SB375 is unlikely to achieve any of its goals. It will be a drag on economic activity. Its impact on global greenhouse gasses will be negligible. Worse, it is very inefficient. Economic research is not ambiguous. Subsidies and command-and-control regulation are far from the cheapest way of improving the environment. The best way to reduce greenhouse gas emissions is through a rebated tax. This would be a carbon tax, where the tax revenue would be rebated to offset a more distortionary tax, say a labor or capital tax. This simultaneously discourages the bad, pollution, while encouraging the good, work or investment.

AB32/SB375 is certainly not the source of all of California’s problems. The state has lots of them, and it’s time we took a serious approach of addressing them. Maybe, we should lose our cool and demand real leadership from Sacramento.

Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at clucerf.org.

On day mid-century we will have to absorb the costs of reintegrating the Californian economy into that of the United States. Before then we will be seeing hybrids hauling (or at least attempting to) families of economic refugees east to the nirvana of the Great Plains....long caravans of Fornies stretching to the horizon.

Somewhat more seriously how do we revive the political process on all levels? The problems of the California legislature seem to be echoed across the country. Back in the 80's many of what are now problems with California were trumpeted as bellwether changes for the better when I was in college. How will we, the children and grandchildren of the Boomers fix the problems that they seem unwilling to face up to.